Published by on December 10, 2013|Comments Off on Bitcoin Believers aren’t wrong, but don’t mistake their faith for fact

Woe is he who talks ill of Bitcoin.

This lesson I learned over the weekend, after publishing a column explaining why “everyday people” – those of us who have not yet leapt into the abyss of cryptocurrencies – should avoid the insanity of the world’s most popular digital currency, unless they’re willing and/or able to take major risks.

A handful of vocal Bitcoin Believers took to the comment section to lament my arguments. I don’t understand how Bitcoin works, they said. That, or I’m railing against Bitcoin out of jealousy and spite for those who are swimming in the digital ether like Scrooge McDuck – I didn’t invest, so I’m whining about it.

Is Bitcoin the innovative, wise investment those who have bought in claim it to be?

To the Believers, Bitcoin is the future – it’s more exciting than any other technology since the advent of the Internet itself. And anyone who thinks otherwise is a ignoramus. You don’t have to have faith, they say – it’s all based on math!

Fair enough – perhaps I am a vindictive troll who reacts to the forethought and success of others by whining like “a woman on her period,” as one witty Bitcoin faithful so tactfully put it. But who cares about that? The important question is this: Is Bitcoin the innovative, wise investment those who have bought in claim it to be? The answer – depending on which facts you want to highlight – may be yes.

First, let’s briefly talk about what Bitcoin is. Warning: This is about to get nerdy. Sorry.

At its heart, Bitcoin is a protocol in the same way the Web (HTTP) and the Internet (TCP/IP) are protocols. Whereas HTTP dictates how Internet-connected computers “talk” to each other, the Bitcoin protocol allows for the encrypted, anonymous transfer of funds (i.e. a unit of value) across the Internet.

To take the Internet comparison further, just as the Internet allows for the free flow of information, Bitcoin allows for the free flow of “money” in ways impossible before its invention. Use a legacy banking system, PayPal, or anything besides cash in an envelope, and you’re looking at fees, delays, and headaches. Bitcoin solves all of this, offering the possibility for instant fund transfers to anywhere in the world, zero or extremely low transaction fees (even when transferring millions of dollars worth of Bitcoin), and the ability to send someone Bitcoin (or fractions of a Bitcoin) simply by knowing their Bitcoin address – no other account information, names, or routing numbers needed.

On top of all these benefits, the Bitcoin protocol is based upon extremely strong encryption and a public ledger system (called the “blockchain”) that uses distributed transaction confirmations to ensure the integrity of every single Bitcoin transaction. (Told you it would get nerdy …)

Bitcoin Believers will tell you that no one really knows Bitcoin’s true potential, just as the Vint Cerf and Tim Berners-Lee never envisioned what the Internet and Web would become when they created the respective protocols on which these world-changing technologies are based.

Combine Bitcoin’s presumed potential for transforming the stodgy universe of finance with its ability to make early investors wealthier than God, and one can fully understand the indignant enthusiasm the Bitcoin Believers have for their dear digital currency.

All snark aside – even if you aren’t entirely convinced that a single Bitcoin should be worth $1,000 or more, it’s impossible to argue that the Bitcoin network lacks depth, sophistication, and the disruptive power of a bull in a china shop.

When it comes to investing in Bitcoin, then, the wisdom of doing so all depends on how much you believe in Bitcoin’s potential. Will it do to banking what the Internet did to the publishing, music, and movie industries? Or is it simply a complicated, over-hyped Monopoly money for libertarians and other super-nerds, a plaything that isn’t really worth a dime?

The answer is anyone’s guess. What I will say is: The more you read about Bitcoin, the harder it becomes to write it off as a silly diversion.

Even if it is a mere game, Bitcoin is one that anyone can play without risking much at all. As one commenter pointed out, you can invest tiny sums into Bitcoin because each single Bitcoin can be broken into tiny fractions (up to eight decimal places), known as Satoshis (after the Bitcoin protocol’s shadowy inventor, Satoshi Nakamoto.) This means you don’t need to bet the farm on Bitcoin – if you want to invest just $1, you can. If the price of Bitcoin plummets (as it’s known to do), so what? If it skyrockets to $100,000 per Bitcoin, hey, you made $100! Not only that, but your investment may further ensure that Bitcoin becomes a game-changer rather than a game.

As I’ve said before, Bitcoin is extremely exciting – if you have faith not only in its potential, but in its ability to achieve that potential. For that to happen, we need Bitcoin Believers; we need people who freak out anytime anyone doubts this potential. Without Believers, without investors – without merchants and exchanges and an ever-expanding Bitcoin ecosystem – the dream of Bitcoin will never come true.

Speaking of price fluctuations, let’s finish this thing off with the elephant in the room: volatility. The Bitcoin exchange rate fell from around $1,055 on Friday to about $600 on Saturday night, before leaping back up to a bit over $920 at the time of this writing (Monday evening). Twitter’s stock price over roughly the same period, by comparison, started at $45.59, fell to a low of $45.02, then climbed back up to a closing price on Monday night of $49.14.

Bitcoin allows for the free flow of “money” in ways impossible before its invention.

In other words, Bitcoin is extremely volatile, even compared to a new, hot stock. But this does not mean Bitcoin is inherently unstable. As Timothy B. Lee argues in the Washington Post, the spastic fluctuations in Bitcoin’s exchange rate are likely due to the immaturity of the currency. Nobody really knows what a Bitcoin should be worth, so we’re “arguing” that point in the Bitcoin markets, causing the price to jump and dive. But as the true value of Bitcoin becomes more apparent and regulators make their intentions known, its price will level out.

“… A clearer idea of Bitcoin’s future value will make its present price much more stable,” writes Lee. “There will be much less room for speculative bubbles based on predictions of rapid future growth, or for sudden crashes based on hints of bad news from regulatory authorities.”

Makes sense, right? Right.

Despite all the giddy excitement around the ingenuity of Bitcoin – despite all of Bitcoin’s potential potential ­– I stand by my original take: Investing in Bicoin right now is extremely risky, and the only way to mitigate that risk is to only put in money you are willing to lose. Maybe that’s $920, maybe that’s $1 million, maybe that’s $0.

Even if your Bitcoin investment doesn’t evaporate in a puff of market fear, however, one must understand that they are betting on an idea – one that needs people to believe in it, or else it evaporates. The same was true of the Internet, and we all know how that’s worked out so far. But can Bitcoin force a complete overhaul of the way the financial industry works, as its proponents argue? And even if it can, should it?

Nobody knows the answers to these questions because nobody knows what Bitcoin will become tomorrow, even if they can explain what it is today.